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World week ahead: Flip a coin, make a bet

Monday 26th July 2010

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Hang on, because the optimism that appeared to be rising by the end of last week may have been redirected over the weekend. Wall Street rallied on Friday, bolstered by more steady earnings reports and news that a mere seven of 91 banks failed stress tests by their national regulators across Europe.  

Last week, the Standard & Poor’s 500 advanced 3.6% to 1,102.66 and the Dow Jones Industrial Average added 3.2% to 10,424.62, cutting its 2010 decline to less than 0.1%. 

And while General Electric on Friday lit a fire on the outlook for the global economy by boosting its dividend by 20%, there has been some rethinking of those euro zone stress tests: basically, were they tough enough? EU officials say yes, analysts are less sure. 

As noted, the tests revealed that seven banks needed a combined 3.5 billion euros - US$4.5 billion - to bolster their finances. Hardly what one might have expected given all the angst over sovereign debts the last few months. And that’s the issue now. 

“I don’t think the market is so stupid as to think that they were so wrong,” Jason Brady, a managing director at Thornburg Investment Management in Santa Fe, New Mexico, told Bloomberg News.

“The right explanation here is that the testing was not very rigorous.” 

So what are investors supposed to do? We’ll find out when European markets open later today. On top of those concerns, Hungary appears set to be downgraded for failing to take the advice of the International Monetary Fund.

The renewed doubts about the strength of Europe’s banking sector - and lingering doubts about the sovereign debt outlook - come just as investors around the world were appearing to regain their tolerance for risk. 

“Earnings reports (from US companies) are helping the market get a little more comfortable with the fact that you can have economic growth more moderate, and in that environment companies can still grow their earnings and are seeing pretty good business,” Walter Todd at Greenwood Capital in Greenwood, South Carolina, told Bloomberg.

“If that trend continues, the market can continue to work higher.” 

The S&P 500 has risen 7.8% from a 10-month low on July 2 on optimism about corporate profits. Of the 149 companies in the index that reported earnings since July 12, about 85% have beaten the average analyst earnings forecast, according to Bloomberg data. 

S&P 500 companies will increase profits by 35% in 2010 and 17% in 2011, the fastest two-year gain since 1995, according to analyst estimates also compiled by Bloomberg. 

"All the indicators still indicate growth, we're just not growing as quickly as we were when we were coming off the bottom, and that makes total logical sense," Michael O'Rourke, chief market strategist at BTIG LLC in New York, told Reuters. 

O'Rourke added he believed the early July low for U.S. stocks would prove to be the low for the year. 

The S&P 500 finds itself standing on top of a key resistance level that could turn into a floor for the market. The index closed at 1,102.66, just above the psychologically important 1,100 level for the first time in a month. The level has been a hard one to hold and could buoy the market if the move is ultimately a decisive one. 

This week brings more results from bellwethers like Chevron Corp, DuPont Co and Boeing Co. 

Companies also are showing signs of standing taller in Europe too. In Europe, 66% of Stoxx 600 companies have topped estimates, including Fiat and Accor SA. 

Markets also have rebounded with an increase in takeover activity. 

US companies have been the targets of US$397 billion in announced takeover offers so far this year, 11% more than at the same time last year, according to data compiled by Bloomberg. 

Yet it may take even more positive data to convince more investors to get back into action. 

"We are really in a much more difficult stage of the recovery right now," Michala Marcussen, head of global economics at Societe Generale, said at a briefing with Reuters journalists. 

She described markets as struggling with a "rotating crisis" in which one problem in one region becomes the focus of concern, only to be quickly replaced by another in another region.

"That ping pong is likely to go on for some time," she said. 

The biggest piece of data likely to focus investors' attention in the coming week is US second-quarter GDP, out on Friday. 

After three quarters of solid growth the world’s biggest economy is showing signs of slowing with firms still reluctant to hire and the housing sector seemingly unable to exit a prolonged rut. 

On Sunday in the US, Treasury Secretary Timothy Geithner told a television interviewer that US companies were continuing to try to drive productivity from current employees rather than hire new ones, adding job growth wasn’t as fast as the economy needed. 

Geithner said he for one wasn’t buying into the double-dip recession scenario.

“The most likely thing is you see an economy that gradually strengthens over the next year or two.” 

Last week however Federal Reserve Chairman Ben Bernanke promised more action if there were further signs of faltering in the recovery. That would particularly be the case if jobs didn't pick up.

"We are ready and will act if the economy does not continue to improve, if we don't see the kind of improvements in the labor market that we are hoping for and expecting," Bernanke told the House of Representatives Financial Services Committee. 

On the commodity front, traders increased bets on price gains for raw materials by 50% in the past two weeks at futures exchanges in New York and Chicago. 

Hedge-fund managers and other large speculators held net- long position in gold, copper, crude oil and 17 other commodities totaling 782,247 contracts in the week ended July 20, according to data from the US Commodity Futures Trading Commission compiled by Bloomberg. That compares with 520,530 contracts in the week ended July 6. The 50% gain was the biggest two-week jump since May 2009. 

The Reuters/Jefferies CRB Index, which tracks 19 raw materials, rallied 1.7% last week, the third straight gain. Open interest in futures tracked by the CRB increased 1.2% last week, the most since April 9.

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